Chapter 1 : International Trade Theory

• At the end of the lesson, learners should be able to:

– Comprehend the meaning of international trade
– Identify different trade theories and policies
– Describe different trade theories and polices
– Differentiate between classical and modern trade theories
– Evaluate free vs fair trade
– LO1 : Discuss the different trade theories,
relevant policies and the economic integrations
– LO2 : Analyse the requirements and impact of
trade policies that surrounds the international
transactions
– LO3 : Identify the implications of trade policies
upon trading contracts
– LO4 : Work in team to develop solutions for the
risks involved in international trading
transactions
• Trade may take place between individuals,
firms, not-for-profit organizations, or other
forms of associations.
• International trade occurs when both
parties to the transaction, who happen to
reside in two different countries, believe
they benefit from the voluntary exchange.
• The inflows and outflows of goods and
services in and out of a country to or from
another country
• The flow uses air, road and water (ocean).
• Almost 80% of the flow of goods uses the
ocean
• In general, trade helps countries gain.
Sales
Contract

1-5
• Policies implemented by the government
covers a wide area, which includes
– Tariff
– Non-tariff barriers
• Mercantilism
Classical Trade Theories
 Country Similarity
Modern Trade Theories
• Absolute Theory
Advantage  Product Life-Cycle

• Comparative Theory
 Global Strategic
Advantage
Rivalry Theory
• Relative Factor  Porter’s National
Endowments Competitive
Advantage
 Classical Trade Theories Modern Trade Theories
• Firm Based
• Country Based
• After WW ll
• Before WW ll • Initiated by realists
• Initiated by theorists • Variety of
• Standardised commodities
commodities • Commodities -
• Commodities - branded
unbranded
 Firm based theories have been developed
for several reasons.
• Growing importance of MNCs
• Inability of the country-based theories to
explain and predict the existence and
growth of intraindustry trade

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

• Interindustry trade is the exchange of
goods produced by one industry in country
A for goods produced by a different
industry in country B, such as the
exchange of French wines for Japanese
clock radios.
• Yet, much international trade consists of
intraindustry trade, that is, trade between
two countries of goods produced by the
same industry.
• Firm-based theories incorporate factors
such as quality, technology, brand names,
and customer loyalty into explanations of
trade flows.
• Because firms, not countries, are the
agents for international trade, the newer
theories explore the firm’s role in
promoting exports and imports.
 Free Trade Fair Trade
• Fair Trade is an
• The act of opening internationally-
up economies is recognised approach
known as "free to trading which aims
trade" or "trade to ensure that
liberalisation." producers in poor
countries get a fair
deal.
 Free Trade Fair Trade
• A fair deal includes a
• It usually benefits the
fair price for goods
larger, wealthier
and services, decent
countries whose big
working conditions,
companies are
and a commitment
looking to expand and
from buyers so that
sell their goods
there is reasonable
abroad.
security for the
producers.
 Free Trade Fair Trade

• Free trade refers to a • Fair trade refers to

general openness to exchanges, the
exchange goods and terms of which
information between meet the demands
and among nations of justice.
with few-to-no
barriers-to-trade
 Free Trade Fair Trade
• Proponents of fair
• Free trade trade argue that
proponents believe exchanges between
that under a developed nations
system of voluntary and lesser developed
exchange, the countries (LDCs)
demands of justice occur along uneven
terms, and should be
are met.
made more equitable.
• An Autarky economy is one which does
not trade and produces all of its goods
domestically.
• Models of this type of economy are often
used to illustrate the benefits of free trade
by comparing social welfare levels in
Autarky to those of countries that use free
trade.
• No economy in the world today is fully
Autarky or fully free trade, but some
countries come close to both.
• The country that uses the closest style of
economy to full Autarky is North Korea.
They only have one relevant trading
partner, which is China.
• Autarky economies are much less efficient
at producing goods than countries that
trade, citizens are less satisfied, and
goods are much more expensive to
consume and produce than in countries
that use free trade.
• Generally, trade is expected to increase
the country’s wealth.
• Respective government of each country
do have differing agendas on their trade
intentions.
• Differing agendas affects the policies
implemented by each government.